Sunday, November 27, 2011

Here is a report of what our Labor Chief Lim Swee Say said at a forum on Saturday:

"A big concern is a mismatch between workers' skills and what's demanded by
employers. Mr Lim said low-wage workers are vulnerable to structural
unemployment.

Another group is the Professionals, Managers and Executives
(PMEs).

He said the last 15 years have seen a concerted effort to train
workers better.

And the current focus on achieving sustainable and
inclusive growth is an extension of this goal." - Report in Today[Link]

Lim Swee say blames the structural unemployment problem on a "mismatch" of skills between job seekers and what employers are looking for. He then proceeds to conclude that the answer to our structural unemployment problems is retraining.

Structural unemployment has been a serious problem for the last decade and the severity of the problem is rising. Yet the PAP leaders refuse to see what is so plain and clear to everyone else and continues to prescribe a solution that had achieved so little results as the prblem grows.

Singapore underwemt great economic transformation in the 60s , 70s and 80s right up to the 90s. We moved from low cost manufacturing to electronics manufacturing to IT services and so on. We did not experience severe structural unemployment right up to the early 90s. While older workers were vulnerable during economic downturns as they are today, they are re-hired during economic recoveries when the labor market tightened up and employers had no choice but to tap the older workers to expand their businesses. Older workers got their chance in the good times and employers were willing to retrain them for job and kept them if they were able to perform. That was why structural employment never grew to become such a big problem in the past.

Since the late 90s, the PAP opened the floodgates to foreign workers. Employers have access to an unlimited pool of young workers from India, China and the Phillipines. When the economy picks up, employers don't have to hire older workers but young foreign workers that can be hired and retrenched easily.

Lim Swee Say's point that structural unemployment is due to a mismatched of skills if that isso, then why are the low wage workers most badly affected? These low wage workers have less skilled jobs and are the easiest to retrained to another low skilled jobs so why are they hit the hardest? The real reason is not skills but the availability of younger foreign workers.

For 15 years the PAP has perscribe retraining for people hurt by structural unemployment. After so much retraining, we find our structural unemployment problems has gotten more severe as time passes. The PAP refusal to face up to the truth and do what is right for ordinary Singaporeans and the continued denial means that the problem can only get worse. With a labor chief like Lim Swee Say, things can only get worse for older Singaporean workers.

Saturday, November 26, 2011

Recently, in an interview on CNBC, the world's greatest value investor, Warren Buffett, said he was ready to buy stocks and the valuations are compelling. Last week Buffett took a US$10B stake in IBM[Here is a good explanation why he did it]. IBM has been around for more than 100 years and has been a blue chip company for the at least the last 40 years so Buffett would have tracked the valuation of the stock over a long period of several decades and only now he decides to buy the stock. You can actually do better than him because IBM stock has fallen a few % since his purchase. Buffett rarely buy tech companies - he owns a small stake in Microsoft. So why is he doing it now? Remember a few years ago when the tech bubble took the Nasdaq index upwards of 6000 in year 2000? The Nasdaq index today, 11 years later is 2440. If you look at the tech bellwethers like Intel, Cisco, Dell they went from P/E ratios in the range of 30-60 to 7-10. Dell today is a $14.22 stock that earns $1.94 per share. The market values the company at US$20B. It has net cash of $8B and annual free cash flow of $3.5B[Link to Dell financial statistics].

If you take the current financial statistics of many companies, you find that they are at their cheapest or close to their levels in history. All the speculative fluff in the dot.com era has completely disappeared and if companies like Dell simply maintain their current performance and do no worse, the stock price can double in 10 years because it would have so much cash in its bank account, it would be able to buy back every share at double the price.

Stock valuations are more striking if you look at what risk free (these days not so risk free) US treasuries are yielding and the current interest rate which is at their lowest in decades. Remember the main cause for the US tech bubble was the aggressive rate cuts by the Federal Reserve after the Asian crisis that drove money towards higher yielding assets such as stocks. So why hasn't the same happened?

An interesting study by Robert Shiller - the guy who coined the term "irrational exuberance", warned us about the tech bubble and housing bubble - shows why stocks may not be as cheap as what investors think. Looking at average earnings in the last 10 years, finds that stocks are actually expensive:

The reason why the average 10 year earnings for stocks are poor is because they include the year when we had the financial crisis. So basically you value stocks with the assumption that there will be an economic crisis within the next 10 years just like the last 10 years stocks, stocks are actually not cheap. If the next 10 years is as unstable as the last 10 years, stocks are not cheap.

However to make money investing, investors shouldn't be asking whether stocks are cheap or expensive but whether they will be going up or down.

So how useful is Shiller's work for making money in the next 5 years? If you look a Shillers' P/E ratio for stocks (see above), you will notice when it shows that stocks are really cheap and get to the bottom valuation of ShillerPE of 10, the stcok market is followed by rallies or stop falling. If valuations go above 30, stocks can go higher but a sharp correction or bear market tends to follow. One thing to note is the financial crisis did not the ShillerPE to below 10 - it stopped at around 13 in the bottom of 2009. That left many investors who were waiting for the market to go lower out of the subsequent rally. Also if you look carefully at the chart, there is a period in the 60s when the market exceed today's ShillerPE of 20 and continued going up for a few years.

I believe the ShillerPE overstate the "expensiveness" of stocks for 2 reasons.

Stocks are not priced in isolation or in absolute terms. When you have money, you can keep it in the bank, but a piece of property for investment, buy some US treasuries or commodities or gold or just keep it in the bank. Because stocks are an investment option and it has to be valued relative to other investments.

This is the first time stock dividend yields pay more than US govt bonds in our lifetime. The reason being investors are extremely fearful of holding any assets with risk so they prefer US treasuries even though the yield is so low. In that sense stocks are cheap because it is unloved by investors...and not for unjustifiable reasons given we are in the midst of a very crisis.

Companies have huge cash hoards (the highest in history) and profitability is at record highs when stock prices are way off their hights.

In my opinion, stocks are not as expensive as suggested by Shiller. However, they have not fully priced in the crisis in the worse case scenario. The outcome of the crisis is a complete unknown and much of the outcome depends on the actions leaders caught in the turmoil. Stocks are probably cheap enough to rally once there is some kind of stabilisation of the global economy. Where stocks will be in the coming months hinges on on whether the EU leaders would perfer a quick "kick the can down the road" approach or a more painful but more permanent fix or something in between. In the longer term, if stocks fall sharply from current levels, they are probably good bargains even if we go into a recession as long as the economic system is not too broken to recover in a few years. In the previous posting on stock valution[oart 1] I showed a valuation approach using book value - stocks become irrationally cheap when investors start selling below their book value....each time that happens stocks prices move up. Such below book value valuations tend to occur during a recessions and a rough estimate puts the STI at 2000 if our blue chips trade at book value.

Thursday, November 24, 2011

The chart above shows the movement of the Australian dollar vs the US dollar. If you take a closer look, you will noticed that the Aussie dollar is 10% down from one month ago and one month ago on end-Oct it was more than 12% higher than in early Oct.

Imagine if you're a US company that closed a contract worth a few million in Australia after months of negotiations with a 10% margin for profits, one month later your profits are are wiped out if you don't hedge your contract in the currency market.

If you go through the annual reports of smaller companies listed on the SGX, you find that many don't hedge their contracts. A whole quarter or even one year of potential profits becomes losses due to large foreign exchange movement.

The large movement can also affect the competitiveness of a country. If a country's currency falls, it makes companies in the country more competitive. For export dependent countries like Japan, the govt intervene regularly in the currency market to make sure the Yen does not rise too quickly.

The movement of a currency can reflect the economic state of a country. If you have a troubled economy, your cirremcy would fall. However, forex markets do not merely reflect the state of the economy, they can amplify the weakness in the economy and make it impossible for govts to fix their economic problems. Mahathir once said forex speculation is evil during the Asian Crisis. He was ridiculed and laugh at by western commentators. Today, we see the problems in the Eurozone amplified not by the forex market but the sovereign bond market - speculators have driven the interest rates for the bonds of troubled countries to historic levels ...these countries may have been able to service their debt at lower interest rates now have a high risk of defaulting because interest rates are so high...because there is higher risk of them defaulting, rates move even higher in a self-fulfiling manner.

Of all the currencies, I choose to show the Aussie dollar because it most clearly reflects what speculators think of the state of the global economy. The Australian economy stands at the cross roads - it is a developed economy that export resources to emerging countries and a western country located nearer to Asia than the other Western countries. When the Aussie dollar goes up, speculators think the global economy is in the pink of health but when the Aussie dollar goes down, it is because speculators think the global economy is getting worse. Speculators can be wrong and constantly correct themselves. 1 month ago, they the Aussie dollar was 10% higher and they thought the global economy was back on its feet today they think the global economy will falter due to the Eurozone crisis. The wild swings in the Aussie currency reflects the uncertain outlook of the global economy.

So how will things unfold in the coming months? Minister Tharman thinks a severe slowdown will occur, the property speculators queuing up in Bedok think that good times for property is here to stay, Warren Buffett sees no sign of economic recession in USA. In the 2008 recession, there was clear consensus that the world economy will enter recession several months before the recession came - the reason was the economy was firing on all cylinders in 2007 with low unemployment and high capacity utilisation. When aggregate demand fell, there was plenty of fat to cut and it became clear a recession was on the way.

Today the US economic activity looks like this measured by the real time Ceridian Index

What has happened is despite making record profits quarter after quarter, US companies refused to expand payroll and invest for expansion due to the uncertain outlook and this has gone on form more than a year since the Eurozone crisis started. Today US economic activity is where it was in end 2010 and it spent one whole year zig-zagging going nowhere. It has not even recovered fully from the 2008 recession. Economists have speculated that the US will slip into double dip recession since mid 2010.

The US economy is largely domestic unlike Singapore's which is export driven and will go where our major trading partners take us. As the US economy struggle sideways, the homebuilding and construction sector has been falling for the past 3 years. The wildcard is when this sector recovers it might give some lift to the US economy. However, it is likely the Eurozone problems tip the US into recession before the US housing sector recovers. It looks like Germany is playing hardball with errant EU countries forcing them into economic austerity and capitulate to more monitoring by the EC authorities refusing any quick fixes such as ECB printing money to ease the problem. Delaying the solution framework to squeeze some fiscal discipline out or EU members is a risky business as the fiaancial markets go into a tailspin.

The falling Aussie dollar in Nov 2011 shows that collective speculators' expectation has completely turned around from a month ago. Contrast that with the relatively stable level of economic activity. Because speculators operate in a herd like manner sometimes with expectations running ahead of reality, some contrarian investors would position themselves against the herd to take advantage of these market "overshoots". The problem is speculators can get it right and their bets match up to reality and the markets go from one extreme to another. Speculators can also manufacture the reality they are betting on - a fall in a currency can cause investors to panic and take their money out of a country leading to more falls in the currency. Based on the Aussie dollar movement, we have again reached the point of high anxiety and fear in the financial markets - a point where the risk is high and so are the potential returns. While the global economy is certainly slowing, speculators seems to have bet on a more sinister outlook some kind of more severe global economic disruption drom the crisis in the Eurozone.

Tuesday, November 22, 2011

First an explanation of the issue. Several years ago, a group of parents with kids with speical needs met with then MYCS minister Vivian Balakrishnan to discuss the type of help govt can give to these parents. One of the biggest concerns for these parents is how their child will be cared for when they are no longer around. The child with special needs may need various kind of care such as medication, some of them need help with their meals and so on. While the parents are still around, very often one of them will quit his or her job to take of the child (you can't really trust the maid who is not trained to do this). You can imagine the challenge even for higher income earniers. For low income families, they whose income is barely sufficient, they fall into poverty and need state help - state help isn't much, I showed a video some time back about a low income family cope with 2 disabled kids, the mother found it hard to go to govt agencies who insisted that she find work instead of getting financial aid from the govt [watch the video here]. If low income families find it hard to get help, middle income families will not get anything...these days with means testing, the last bit of subsidiy for special schools was removed for parents of these children.

These parents face enormous hardship caring for their children when they are alive - its a labor of love but very tough financially and emotionally. Concerned that nobody can care for their children properly when they are gone, they went to went to ask the govt for help. Perhaps they were hoping the govt set up good facilities and institutions where they can feel safe to leave their children when they are no longer around - since they have already spent their lifetime caring for their child. These caregivers know how tough it has been for them so they find it hard to ask relatives or siblings to do this when they are no longer around and some of them have nobody to turn to.

The govt response to the problem is this : while the parents a alive and working, set aside a part of their CPF (their own money) in a new Special Needs Savings Scheme. CPF will help to disburse this as a monthly instalment when the parents are no longer around. The Straits Times headlins for the article is "More CPF protection for children with special needs""

"The CPF Board is stepping in to help provide a measure of financial security for children with special needs, when their parents are no longer aaround to care for them" - Straits Times 22 Nov 2011.

All the govt is doing is administer some of your own CPF money to make out monthly instalments - thats all! Quite incredibly the article starts off saying the CPF Board "is stepping in to help provide a measure of financial security" as if the CPF is giving money to the child. What security is there for lower income parents who don't even have enough for themselves to retire?

To say the govt has fallen short and failed these parents is an understatement. In every developed country today, the govt get involved early to full support to parents because they are in such a tough situation. Here the parents have to make huge sacrifices when they are alive yet the govt is only willing to play administors to lock up their CPF funds in a special account and give it out in instalments.

There are very few Singaporeans who would oppose the govt doing more for these parents. The only people stopping the PAP from doing more is the PAP govt itself and its ideological preference not to help. This is a govt with the means to do it - it can give thousands of scholarships to school the children of foreigners but cannot do something for these children of men who served their NS.

Bedok used to have this bus interchange that has been there for more than 2 decades. The govt sold the land to private developers to build a condo project. It will be a good place to live because it is next to the MRT station and near a new bus interchange that will be build next to the project. I'm quite sure the location is good because I lived for more than 10 years in my father's 4-room HDB flat no more than 100 meters from this development. My dad's HDB? Something like $50 psf. My dad sold it to another owner for $80psf. While condos fetch a premium because they have facilities and a nicer build, I still find this $1250psf startling. A small 800 sq feet unit will cost $1M. It will take someone working as an enginner or software programmer decades to pay off his loan.

I met my dad for lunch over the weekend and asked him how he paid for his 4 room HDB flat. He did in 3 years because he already had some savings in his CPF before he bought the flat. My dad worked as a technician.

The PAP's mantra for workers is make yourself cheaper, better and faster. to be more competitive. But how does one compete when costs are so high. Workers elsewhere enjoy cheaper cost of living even those in Australia or USA, can get a home just outside the city for less than $150K and drive to work for the cost we pay for public transport. The responsibility for our competitiveness does not rest solely on the shoulders of our workers. The high cost of housing eats into everything - our competitiveness, our quality of life, our ability to save and retire ..and ability to start a family.. Ex-minister Mah explained that prices are high to fill the govt reserves - selling homes at lower price is equivalent to raiding our reserves.

Lets not forget the lessons from the financial crisises and property bubbles in Spain, Ireland and USA. When the debt builds up and prices come tumbling down, the negative effects will be long lasting. For Singaporeans, whose ability to retire, is linked to property ownership because our CPF accounts have been emptied for the purchase of HDB flats...when things go wrong, they can go very wrong.
---------------------Business Times - 22 Nov 2011

Queues return for Bedok condo launch
By UMA SHANKARI

(SINGAPORE) CapitaLand will start the sale of its newest condominium Bedok Residences only tomorrow - yet a queue of more than 400 people had already formed at the project's showflat by last night.

The developer said that prices of the 583-unit project at Bedok Town Centre have not been finalised, but agents said last week that prices could start from around $1,250 per square foot (psf) for the smaller units and $1,150 psf for larger units.

CapitaLand, South-east Asia's biggest property group, confirmed yesterday that it would start selling units only tomorrow. But a queue started to form outside the project's showflat on Sunday, BT understands.

The 99-year leasehold development offers a mix of one, one-plus- study, two, three, and four-bedroom apartments, as well as penthouses.

The developer hopes that the project's location would ensure good take-up.

Bedok Residences is part of a 15-storey integrated development comprising homes, a shopping mall and a transportation hub linked to Bedok MRT station. CapitaLand is developing the entire project jointly with its retail unit CapitaMalls Asia.

Wong Heang Fine, chief executive of CapitaLand's Singapore residential arm, expects strong demand for Bedok Residences, 'given its strategic location in one of the most popular residential estates in Singapore and unparalleled connectivity to various parts of the island'. 'Sitting atop a shopping mall and transportation hub, we believe Bedok Residences will rejuvenate the Bedok residential estate and enjoy the exuberance and convenience of the lively Bedok Town Centre,' he said.

Nearby, UOL Group and Singapore Land intend to roll out their newest project, the 577-unit Archipelago @ Bedok Reservoir, within this week or next week, BT understands. The project is located on Bedok Reservoir Road.

Monday, November 21, 2011

Our ex-MM Lee tried to explain to MP Low why being in a "Europe situation" is highly advantageous and being surround by the type of neighbors we have our situation is a lot more difficult. Well, look at Europe now and the sa-called "European situation". I didn't dig out the video to show ex-MM's comprehension of the world but to show how uncertain the world is even for someone as wise as Lee Kuan Yew. How can ordinary Singaporeans prepare and become completely resilient in such an uncertain world with their limited resources? Anyway, the leaders in Europe are not asking for more pay because they are solving bigger and more intractable problems - in fact the situation today requires them to cut their pay to elevate the declining morale and earn the trust of their citizens. 5 govts in Europe have been replaced in the past few weeks so it is not easy to be the leader of a European country.

Well I guess Minister Tharman has a clearer assessment of the current situation given he is in the IMF and has access to data not available to analysts and commentators. IMF conducts audits on European countries that it bails out so they have the "real" picture. DPM Tharman tells us the situation can get quite bleak:

"We have to prepare for the possibility, the very real possibility, of rough
times ahead, a severe slowdown in the global economy," - DPM Tharman[Link]

Tough times are nothing new these days. In the last 12 years we have had 3 recessions and 2 major crisis. The one that is happening now will the the 3rd crisis and the impending recession will be the 4th. As we go through one recession after another and one crisis after another, the underlying situation for ordinary Singaporean families is not the same. We are entering each recession with bigger income inequality than the last one. We are going into each recession with more people at the borderline of poverty than the last recession and higher cost of living - medical care & housing costs.

""That has been the way we have dealt with past crises, not become all defensive, not retreat, but use the crisis as an opportunity to build up skills and build up competitiveness."- DPM Tharman

Each crisis should seen as an opportunity. However, these crisis are occurring at a higher frequency than ever before and the ordinary Singaporean is put in a highly unstable situation sometimes unable the build up his financial defenses given how fast things turnaround. For a large number of Singaporeans, they may be trained in sectors that go into secular downturns and slumps. It is easy to just say retrain yourself for another sector but much of the job experience is no longer applicable and workers have to start over. You superimpose this situation onto what we the system we have for housing, transport, healthcare and retirement, yuo can see why worries have started spreading to the middleclass. Even before our next recesssion, the bottom has already fallen out for the lower income group. This issue was discussed in today's mult-page feature in the Sunday Times describing how bleak the situation for those belonging to the bottom 30%. The cost of living incease has simply pushed many of these Singaporeans to a level where they are struggling to make ends meet and keeping their heads above wate - how is this different from living in a third world country?

The fear now is spreading to the middle class who are starting to experience the instability and insecurities that previously affected poorer Singaporeans. With the increase in healthcare costs and housing outstripping middle income growth and middle class comforts like a family car moving up the classes and out of their reach, the middle class is sliding down and falling towards a quality of life that the poorer classes are experiencing. A few days ago, it was reported that the best selling car in Singapoe is the BMW - with more people and fewer COEs, the quota now goes up to richer classes where wealth in concentrated. The COE goes not to the middleclass father who has to send his children to school and his wife to work but to the teenage child of one of our multimillionaires - a mismatch of needs so common in a society where the wealth distribution has become the most unequal in the developed world.

Minister Tharman says the challenge is for Singapore to bounce back from the slowdown. But Singapore recovers when the global economic demand picks up and the usual influx of foreigners will always boost GDP artificially. The real challenge is to contain the income inequality and poverty that expands after every recession. There is a growing number of families that are taken down after every recession and never make their way back when the economy recovers. There economic sectors that decline and don't recover when the economy recovers. Many will face a permanent loss of income and degradation in quality of life. While Singaporeans are told to be resilient, many of them are suffer from the consequences govt economic policies to always grow the GDP as fast as possible - sometimes shifts to industries that no longer require their skills but that of foreigners. While it often ideologically argued that any aid to Singaporeans in the form of subsidies and direct help should be avoided, the expanding inequality and rising poverty makes it unavoidable. Workfare, for example, is necessary in recent years because many low income Singaporeans work full time jobs but cannot make ends meet. We are not talking about a small number here but 400,000 Singaporean workers[Link] who cannot keep their heads above water. But for every Singaporean that has sunk below the poverty line, there are many heading down from the ranks of the mddleclass that will thin out as income inequality expands.

The real leadership test is not whether we can recover when the global economy recovers but whether the leadership is able to solve the real problems faced by Singaporeans. GDP growth is starting to mean very little to Singaporeans, if anything, more people are become very wary what is traded away to achieve this growth. We need leadership to think hard what was the purpose of having GDP growth in the first place - ultimately it is to better the lives of ordinary Singaporeans. But the high growth of past decade came a double digit rise in the cost of housing and medical care that outstripped the rise in income of most Singaporeans. The wealth creation was highly concentrated in the top 5-10% of the populace with the rest of Singaporeans sufferring from effects of high income inequality. For the ordinary Singaporean, what is the purpose of growth when it does not narrow the income gap and grow their income at a fast enough to make housing, medical care and transport more affordable? The frustration with the PAP in the 2011 elections showed up after the economy rebounded from the financial crisis when people realised they did not benefit much and many saw a marked deterioration in their quality of life.

Make housing affordable, make medical care truly universal, narrow the income gap and provide safety nets. The basic 1st world safety nets of good universal healthcare, unemployment insurance, affordable public housing and transport, aid for poor, sick, elderly and disabled....are the real benefits of becoming a 1st world nation. We arrived in the 1st world with a 3rd world wage structure and many did not benefit from the economic growth of the past 2 decades. With or without a slowdown, the leadership of this country faces a test whether they fix the imbalance in our economy and the real problems faced by Singaporeans today.

Tuesday, November 15, 2011

LAST UPDATE: With the Italian and Spanish bond yield spiraling out of control crossroads for the EU will be reached pretty soon. The only choices left are all bad - they will have to choose the least bad. This article puts the choices that confronts the EU very clearly Why Europe's Central Bank May End Up Printing Money or face a disintegration of the Eurozone. The Italian govt needs to maintain a budget surplus of 5% just to maintain its debt level - this is not going to happen. With bond investors demanding close to 7% yield on Italian bonds, Italy's debt burden will escalate and default become mathematically inevitable unless the ECB intervenes. As the indecisive leadership in Europe does the "wait and see", France, the 2nd largest European economy faces a downgrade of its debt and substantially higher financing cost destabilising the entire EU. Germany itself depends mostly on its neighbors to buy its exports Unless their plan is to simply refuse to allow the ECB to print money at all cost and take immense pain of a recession (some say depression) that comes, it make sense to act early - if they wait to be forced by the markets, like the 2008 financial crisis, the consequences will be terrible when the situation spiral out of control. If they simply refuse to do it (print money), they have to be prepared to watch their economy sink and the EU breakup. Going back to my original article, I was perhaps too optimistic that European leaders will act to arrest a predictable deterioration of the situation ....this crisis has gone on and on for 2 years, they do something when they are forced to do it and never got ahead of the problem. This is almost the best time for the Germans to nod their head and just get it done, their neighbors have been been punished enough by austerity, social unrest and collapsed govt - the issue of moral hazard is no longer there. But yet we see a George Bush in Merkel, Bush held out ideologically a "no bailout" until Lehman collapsed and he was forced to bail out everyone. Merkel confronts a situation that is similar and a "no-printing money" ideology resulting from bad German memories from the Weimar Republic hyperinflation ...but the situation is completely different now and the consequences of not acting will be devastating for EU and perhaps the rest of the world....Here's an interesting article by Jim Jubak on Germany’s Support Withers as Euro Panic Worsens. He wonders how long Merkel can hold out as pressure mounts on the ECB to do something.

FURTHER UPDATE: A few commenters correctly pointed out that ECB is bounded by rules of the EU treaty not to print money. The rule is in place to avoid moral hazard. However, the ECB has been buying sovereign bonds to contain the crisis but in a limited manner to keep sovereign debt interst rates from spiking up. The question whether ECB will be a lender of the last resort and use a "wall of money" to end this crisis or keep intervening in the secondary market until "something happens". If the situation spirals out of control, the EU itself will disintegrate so that is incentive for the ECB to act. There is a fuller discussion of all the options for the EU here : Waiting for deus ex ECB by James Saft. Relooking at all the information, I have to admit my original posting is too optimistic and naive. The stock market, currency market and bond market appeared to have taken different positions on Europe : Stock Making a risky bet on ECB printing money....the writer wisely points out there is no coherent or consistent view of how the situation will develop which explains the volatility we are seeing. If we go back to the prophetic book "Debt and Delusion" written in the 1990s, monetizing debt (printing money) is the least bad of all the bad options that confront a country that cannot pay its debts - so we see countries like US, UK, Japan printing to pay its debts. Some believe it is the most likely outcome for the EU and the question is when not whether they will do it.: Will The ECB Print Money? The Key Question For European Debt Crisis

UPDATE: After I made my posting, an article appeared in Globe and Mail exploring the same idea with some figures to show that it is feasible [:ECB could bail out Italy in a jiffy]. It shows that if the ECB is willing to print money at the same scale as the Bank of England, it will be able not only to cover Italy's budget deficit but its entire budget for they year and Italy would not need to go to the debt market at all for one whole year instantly defusing the crisis. The UK central bank has already printed £275B and it did not cause price instability there..
I've been watching the doom and gloom predictions of pundits on TV quite closely. These dire predictions include that of a 'Lehman moment' for the current crisis that describes a sudden catastrophic financial failure of a country or a major bank with reverberations reaching to every corner of the financial world. I also hear talking heads criticising Europe for the lack of leadership in particular the Germans (Angela Merkel) for failing to quickly defuse the crisis. My view of things are rather different. I actually believe the German leadership knows exactly what it is doing and is getting what it wants from everybody. ...let me explain....Lets start with a few questions and answers...

Which is the most indebted developed nation in the world? The answer is not Greece but Japan. In fact Japan has double the debt to GDP compared with Greece How come Japan is not in crisis like Europe or Greece? Japan is able to borrow money cheaply at 2% interest. What about USA? USA is also a highly indebted nation but investors are flocking to buy US treasuries (US debt) and they can't seem to get enough of it driving 30 yr US treasuries to the lowest interest rate in history. US is deep in debt but creditors are very eager to lend it money. Spain collapsed and needed a bailout very early on in the crisis at a point in time when its debt to GDP was smaller than that of Britain. Creditors did not want to lend money to Spain but are more than willing to lend to Britain. Why?

The answer to all the above question is Japan, Britain and US owe a debt denominated in its own currency so they can print as much money as they need to pay their creditors so it is not possible for these countries to default. During the Asian crisis, Thailand had a debt denominated in US$ so when the baht fell against the US$ it collapsed quickly because it could find enough US$ to pay its creditors. So the main difference between countries in trouble and those that are not is not the size of the debt but whether they are able to print money to pay down their debts.

How come the ECB (European Central Bank) did not print Euros and print its way out of the crisis? They were trying to at some point but the Germans opposed to it. Printing money has this effect of stealing a bit of money from everyone in the Eurozone (by way of inflation) and it is unfair for the Germans who have kept their deficits small by cutting entitlements for its citizens.Printing money to bailout these nations will result in a moral hazard ...these countries have to learn some important and painful lessons. So instead of printing money which was a relatively easy thing to do, the Europeans orgainsed a massive bailout package known as ESFS [Link]. If a financially troubled nation wants money from the ESFS, it has to play ball by implementing harsh austerity measures and promises to cut deficits something these countries refused to do before the crisis.. The Germans got what they wanted out of these spend-thrift nations using the ESFS as a big stick. Without ESFS money, these countries would have to default on their loans and the govt would collapse instantly because they have no money to keep the govt going.

With the political leaders in Greece and Italy thrown out and replaced by technocrats who previously worked in the ECB and EC, they will quickly pushed through budget cuts and austerity in the respective countries. Creditors who lent to Greece have been punished with a 50% haircut on the amount they loaned.

Now with every one who misbehaved painfully punished, I believe the ECB will start printing money and buying sovereign debt of troubled European nations. It had done so intermittently in the past but have just declared they print money and buy all the sovereign bonds they need to buy to stabilise the situation [ECB bond buys will go as far as needed: Kranjec], The Germans will not stop the ECB at this point because they have already gotten what they want in terms of austerity and fiscal discipline from nations that caused the crisis. Germany is highly dependent on these countries to buy their exports and cannot have the situation deteriorate. Printing money and buying bonds is an incremental process that does not affect significantly price stability (cause massive inflation) in the short term....it pushes the interest rate down and gives the ESFS more "bang for the buck" instead of giving high returns to creditors.

In short, despite what we see on TV and read in the news papers and our Prime Minister urging European leaders to put in more effort to "avert a global meltdown" (Focus on euro zone crisis, avert global meltdown: PM).....I believe the crisis has already ended. While there may be sudden kneejerk of financial markets reacting to various news from Europe, the worse part of the crisis, I believe, is behind us. The problems in Europe are long term in nature and will be morph from a crisis to a graceful degradation...they will can and keep kicking the can down the road spreading their financial problems over time..

Saturday, November 12, 2011

I was a lazy buyer when I bought my property more than a decade ago just after Asian Crisis. Prices had fallen to the level that I thought would be prudent to buy. But the effort I put into selecting a property really left much to be desired later on. When I arrived at the development the day it was launched, I took a look at the show apartment for a 3 room unit, I thought it would be big enough - special effects of mirrors and interior decor aside. I spoke to the sales person who told me I was "late" and all the best units have been snapped up by buyers queuing overnight and only 20% of the units were left. The sales guy told me units are all differently priced - the facing, level, etc all affected the price. I didn't quite understand why lower floor units were priced cheaper but figured the facing was important but was okay as long as the unit didn't face the afternoon sun. I told the sales guy to help me pick a 3 room unit with the facing I wanted. 25 minutes was all I put into selecting my property.
.
When I got the keys to my unit, I was quite excited and went to unit immediately to have a look. When I opened the door, I was very disappointed because the apartment was much smaller than the show unit. It turned out there were 2 types of units with 3 rooms and I bought the one with the smaller floor area. The unit was much smaller than the 4 room HDB flat my dad bought 20 years for one-tenth the price I paid for the apartment. This kitchen felt like it was half the size of the one in my dad's HDB flat. The children's room was smaller than my own room in my dad's flat. Inviting a few friends over and you feel the squeeze. When we have gatherings, we have to always trim down the list because place is too small. There are I things to want to buy to improve my life but cannot do so because the house is too small.

A few months ago, a friend came to my place to give me his wedding invitation card. He had just purchased an apartment and the down payment wiped out all his savings. When he came into my apartment, he said, "Wow! Your apartment is so big!". He was not being sarcastic, He bought an apartment much smaller than mine and paid double what I paid.

The incredible shrinking homes of newly married Singaporeans due to prices of homes rising much faster income is phenomena that has been with us for the past 25 years. A 5-room flat today is much smaller than the 5 room flat 10 years ago which is smaller than a 5-room flat purchased 20 years ago. Smaller homes affect the quality of life.

"Our families are smaller. In the old days, we have very large families living in a flat. Today, the family is two, three, four (people)." - HDB CEO[Link]

Actually for many Singaporean families, the inability to own a bigger place is the reason why couples have fewer children. It becomes extremely unpleasant to pack 5 kids and 2 parents into a typical 700 sq feet 3-room flat. Kids grow up and you will soon have 7 adults in that small space. Many Singaporean families have fewer kids because property is expensive and all they can afford is a small place comfortable only for a family of 3 or 4 people. The HDB CEO got is logic all wrong. In fact if you look at the places with the lowest fertility rate, it correlates with high home prices. The lowest fertlity rates are in Singapore, Hong Kong and Macau:

These are also places where property is so expensive people typically live in small apartments. Our nearest neighbor Malaysia has a fertility rate of 2.70. More than double the fertility rate of Singapore. Malaysians do not love having children twice as much as us. What they have is lower population density and larger homes. In fact studies in the past years have shown that higher population density leads to lower fertility rates:"Where you have high amounts of high-density housing you have very low birth rates ... where you have density, you tend to have very few children."- Professor Kotkin, fellow at California's Chapman University and London think-tank the Legatum Institute.[Link]

The HDB's idea of building smaller and higher density housing and PAP's policy to import foreigners increasing the population density on our small island is driving down our fertility rates. Instead of removing the causes of the low fertility rates, they use the outcome of lower fertility rates to justify the need to bring in import more people and build smaller homes for Singaporeans. This mixing up of cause and effect puts Singaporeans in a vicious cycle of falling fertility and increasing foreign influx. Expanding the population by importing people puts a enormous strain on the long term citizens of this country - our numbers will languish and we will end up a minority in our own country.

Monday, November 07, 2011

Here's an interesting clip from Al Jeezera documentary on the financial crisis Meltdown. Part of the video discusses the case in which the SEC went after Goldman Sachs for selling complex financial products to ordinary American citizens ("widows and orphans") in which it was the counterparty to benefit. from the failure of the products. Goldman coughed out US$500M as fines and compensation. In a similar caserecently, the SEC went after Citibank for mis-selling US$285M mortgage bonds to investors[Link].

A group of Singaporeans who lost their money in High Notes 5 sued DBS Bank. The High Notes 5 was a product created by DBS Bank in which it was the counterparty should the

Other investors like retiree Tham Wai Wah, 60, also felt 'cheated'. She had
trusted the relationship manager who had explained to her last year that the
High Notes 5 product was 'very safe'.She said that with only an O-level education, she could not fully understand
the prospectus. 'I told them I'm a conservative investor and that this was my
CPF money.'

There were 1084 investors of High Notes 5. 873 filed for compensation, of that number, 669 received nothing[Link]. A total of 7.8% of the amount invested was returned to investors.

Because of the proactive involvement of the Hong Kong govt, Hong Kong investors received far higher compensation[Link]. The Singapore govt left it to the banks to decide who deserve compensation and how much. The Hong Kong govt negotiated a settlement with the banks in which investors would get back 96.5% of the money invested in Lehman Minibonds[Link].

DBS High Notes 5 investors in Singapore were left without any choice but to try to get their money back by suing DBS.. They lost the case and appealed against the verdict. They lost the appeal last week and reached the end of the road in their pursuit of justice. It is hard for private individuals to win a legal case against the bank because they are well covered by the terms in the contract. The Hong Kong strong-armed the banks into paying and the US SEC threatened a full blown investigation imless banks pay up. It takes a govt like the PAP to abandon ordinary citizens and leave them to fight alone for their own interests against powerful banks.

The video below also covers the real estate boom and bust in Spain and Dubai. There are many lessons here for us:

"Dubai in many ways, not to be too uncharitable, was a state pyramid scheme...a state ponzi. It relied on more people coming in to buy their property or even their deposits of people who were there earlier than them...and it had to keep on going"
- Christopher Davidson author "Dubai : The Vulnerability of Success", 19:10mins into the video.

The race to be the financial capital of the world was an important contributor to the crisis. This race is essentially a race to the bottom as govts deregulate to attract financial institutions:

"The real problem that we face going ahead is this same kind of pressure - where is going to be the financial capital of the world...is going to come back once the memories of the crisis has faded/ Certainly, Frankfurt and Paris are going to be back into the race....so is Tokyo so is Singapore so is Shanghai so is Hong Kong. And what I think may well happen at some point it is going to be Hong Kong and Shanghai combine ....its going to be regulatory arbitrage.....its going to be a race to the bottom" - Paul Martin, former Candian Prime Minister, 30:13min into the video

How did the toxic Lehman Minibonds get into Singapore and not other countries? Why are there 1000 investors in Singapore using MF Global wondering if they can get their money back? Why are banks calling you 2-3 times a day on your cellphone asking you if you want an unsecured loan?

We deregulated to attract banks and foreign financial institutions. The govt wants to keep the GDP growing by growing the financial hub. Lets be mindful that this is a race to the bottom and the collateral damage may be the lives and well being of ordinary Singaporeans..

Friday, November 04, 2011

Recent days we have seen some rhetoric from the govt about the need to prevent discrimination against Singaporeans by employers who advertise only for workers with work permits or holding PRs..i.e. foreigners."Speaking at a tripartism forum on Monday, Minister of State for Manpower, Tan
Chuan-Jin, stressed that discriminatory practices have no place in
Singapore." - CNA Report "Discriminatory practices have no place in S'pore: Tan Chuan-Jin"[Link]

So after telling us that foreigners create jobs for Singaporeans for the longest time, isn't it a big turnaround for the govt to now start talking about discrimination against Singaporeans? There are numerous reasons why employers hire foreigners including the reasons cited by a writer to the Straits Times (see below). Foreigners from developing countries have their families back home are willing to accept a lower pay compared with a financially stressed Singaporean breadwinner - after you hire him, you find that you're under pressure to increase his pay because you know his cost of living is high and escalating every year. For a foreigner, he is paid so much more than back home, you don't have worry about him being unhappy with pay...if he is not happy you simply send him home without burdening your conscience too much. Foreigners coming from poor developing countries are willing to accept all sorts of working conditions and lack of benefits that workers in a 1st world country find ridiculous. American employers like to hire Mexicans, the French employers like workers from poorer European neighbors like Portugal. ....our employers like to hire from Philippines, India and China.

It is a futile for the govt to talk about discrimination after opening the floodgates for foreign workers from developing countries. Tan Chuan-Jin's idea of warning employers not to advertise just for PR and Work Permit holders and to include Singaporeans is a superficial move that will not solve the problem. Employers will just get applications from everyone, select foreigners and toss the resumes of Singaporeans into the waste paper basket. The people who suffer the most due the govt's policy are the older workers who cannot find employment because employers have access to a large pool of young foreign workers. The main reason for employers to hire older workers in the past was a tight labor market when they had no choice but to tap the pool of older workers. By opening the floodgates, the PAP govt created a severe structural unemployment problem and many Singaporeans live with this fear of becoming a unemployed PMET or take deep pay cuts to stay employed when they are older.

I do not expect the situation to improve much soon. A few small changes to restrict the hiring of foreigners implemented by the govt early this year saw much resistance and complaints from employers. Many of them have over time become very dependent on foreign workers. The govt took the short cut to GDP growth by pandering to business demand for cheap foreign labor instead of investing to improve productivity and innovating to move up the value chain . We have walked too far down this road and it is now very difficult to turn back quickly. The high social costs makes this model of growth unsustainable and the price has been paid for mostly by ordinary Singaporeans who have to struggle harder to support their families.
-----------Employers want foreigners to avoid paying salary increment and CPF [Link]

It is very common for employers to recruit foreigners on a work permit or S-Pass for two years and at the end of the validity period, send them home and recruit a fresh batch of foreigners for the same tasks ('Don't discriminate against Singaporeans'; Tuesday).

By doing so, employers do not have to contribute to the Central Provident Fund for the employees, pay a yearly increment or bonus, plan a career path or provide employment benefits.

It is not surprising that Singaporeans are often passed over for such positions. Some employers even promise the foreign worker the maximum salary as indicated by the respective types of employment pass; and once the worker arrives here, he is told that a certain portion of the salary (in the form of a certain allowance and not part of the basic pay) will have to be returned in cash to the employer every month (to avoid leaving any evidence for subsequent investigations if a complaint is lodged).

The foreign worker has no choice but to accept the deal or be sent home. Although the levy and minimum salaries for the various employment passes have been raised, it is still cheaper to recruit foreigners than Singaporeans, and employers will continue to utilise the maximum quota of foreign workers allotted to them.

The average Singaporean worker is pickier about employment because he has more arduous responsibilities. The well-being of his family is at stake, compared with a foreign worker who is usually here alone earning a salary that will let his family back home live far more comfortably.

It is easy for employers to excuse themselves from recruiting Singaporeans by generalising that Singaporeans are not willing to take on low-level jobs.

But as long as employers continue to practice the 'cheaper' option, there is no way a Singaporean worker can compete with a foreigner. It is true that businesses exist to make money, and very few can survive on national pride alone (by recruiting citizens only). However, the Government has a duty to ensure there is fair play in the workplace for Singaporeans, and clearly, we need more bite in the current employment policies to ensure employers do not take advantage of such policies to disadvantage the Singaporean worker.

Thursday, November 03, 2011

UPDATE: A few people wrote that MAS has rules to require brokers such as MF Global to seperate client money from its own. Having a law is one thing but ensuring that it is followed by effective policing is another. Also, are Singapore investors using MF Global in the situation as investors of defunct s-chips - the MAS unable to go after the wrong doers because they are not in Singapore even though the crime was committed here. It is useless to have laws when it is hard to go after people who break it.

MF Global a financial dervatives broker has collapsed and filed for chapter 11 bankruptcy. MF Global was allowed to operate in Singapore offering exchange traded derivatives, futures, options, forex and OTC (over the counter products) such as contracts for difference.

MF Global collapsed due to wrong bets on European sovereign debts but that is not the main problem. The CEO, a former Goldman Sachs executive, dipped into client money to pay for losses. Now it is not clear how much money can be recovered[MF Global accounts shock leaves clients scrambling]

MF Global has been operating in Singapore[Link] and signing up clients here. The number of clients is about 1000 . However, MF Global is not the only one operating here. Over the years our financial sector has been deregulated to the point, many such brokers of various sizes have set up shop here. It is very hard to educate investors on the risk of setting up an account with these firms as they weave into our financial system and many Singaporeans simply believe they are safe because they are allowed to operate here - many are not aware that the Singapore govt, out of its aspiration to be a financial hub, has been deregulating to attract investment banks and brokers to set up here. These firms are allowed put out glossy advertisements in local financial magazines, on our cable channels and set up booths in Raffles Place and at exhibitions to sign up clients and some offer free 'educational' talks on investing. It is quite easy for them to sign on clients as they make themselves appear legitimate and safe but they are not well regulated or monitored by the authorities. The PAP govt jumped onto the bandwagon of deregulation but how wise is it when you allow your citizens to be exploited with so little or no benefit in return.

Several months ago, I decided to visit the office of one of these 'major' international brokers who has been advertising in our papers. magazines and at various Singapore websites. This broker has signed up thousands of clients offering an OTC product known as 'contract for difference'. I met the customer service officer (a Filipino) and the nice lady told me that the firm has hired 5 or 6 people - so they don't create much employment here.

Economists who view the financialization of the US economy negatively believe that much of the derivative trading has turned into nothing more than gambling. In the past, derivatives were used to hedge and pass on risks for businesses to speculators - it has turned into large casino. Most of the trading activity produce no net benefit for the economy. Singapore wants a piece of Wall Street but we take the best and leave out the less regulated modern day 'bucket shops' that will certainly bring grief and harm to our people. It is not clear if the MAS and the PAP govt will learn anything from this episode (MF Global collapse) but it is certainly time for us to rethink 'deregulation' even though nobody has Occupied Raffles Place because the police warned people not to be 'misguided'....but who really are the ones 'misguided'?...The ones who deregulated our financial industry to the point that left thousands stung by losses in toxic products or rogue brokers....or the few brave ones who wanted to Occupy Raffles Place?

Tuesday, November 01, 2011

One of the comments to my previous posting pointed out Wilkinson shows that Singapore has the highest prison population per capita after USA among developed countries. I did a quick check and statistics show that we have the 2nd highest rate of incarceration in South East Asia - see the last column of the following table which shows prison population per 100,000 (Source: Link).

Our rate of imprisonment is triple that of Malaysia.

There is this poster that the SPF put up around housing estates that says "Low Crime Rate Does not mean no crime".

If our crime rate is low, why are there so many people imprisoned? The USA has a large prison population because the crime rate is high. Some of you may argue that our police force is very effective compared with the developing countries around us i.e. they are better at solving crimes. However, that does not explain why we have such high rates of imprisonment compared with other developed countries where the police is equally effective.

What is the cause of such a high rate of imprisonment? I have a few hypothesis. While crimes like robbery or theft may be low giving us a general sense of security i.e. can go out at night without fear of getting robbed, other crimes like loan sharking, smuggling of contraband (which is victimless?) and illegal prostitution occur at a much higher rate....and may have a causal relationship with social inequality The other plausible explanation is our laws are harsh and puts people behind bars for lesser crimes such as creation of graffiti, setting up a tent withou a license at the beach[Link]. inability to pay parking fines[Link] and jaywaking[Link].